Flipping Houses For Dummies®, 3rd Edition
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Library of Congress Control Number: 2017934019
ISBN 978-1-119-36307-1 (pbk); ISBN 978-1-119-36311-8 (ebk); ISBN 978-1-119-36310-1 (ebk)
Maybe you know somebody who buys and sells houses and makes as much money on a single transaction as you make in a year. Or perhaps you caught an episode of one of those house flipping TV shows that demonstrate just how easy it is to buy a house for $250,000, fix it up for another $75,000, and sell it for a half million bucks in a matter of days. Now, you want in on the action. You want your slice of that capitalistic cannoli.
But where do you start? You can’t imagine where you’d be able to get your mitts on the cash you’d need to finance a flip. You have no idea where to start looking for undervalued properties, and even if you could find a suitable house to flip, your expertise in the field of home repairs is limited to plunging the toilet. Surely you’re not qualified to invest in the complicated world of real estate.
Well, it’s time to stop all the negative self-talk and start reading Flipping Houses For Dummies. I started out with $900 that my grandmother gave me in the early 1970s. From the ripe old age of 19 to the present day, I’ve flipped one house after another and earned millions of dollars along the way. It wasn’t easy. Some of my flips flopped. I didn’t profit from every transaction. I did, however, have a plan in place and the sticktoitism (pronounced stick-to-it-ism) to successfully execute it. By following through, I was able to succeed, and so can you. (By the way, sticktoitism describes the determination and dogged perseverance required to build wealth in real estate. I could use stick-to-itiveness, which actually appears in the dictionary, but I like my word better.)
Unlike other books, TV shows, and late-night-TV gurus, this book doesn’t promise an easy, risk-free way to score quick cash by flipping houses. Instead, it takes an honest look at the practice of flipping houses.
In this book, I reveal what I’ve learned in more than 40 years of flipping houses and working with buyers, sellers, and other real estate investors and professionals. I show you how to do everything from building a team and securing the cash you need to finance your venture to finding undervalued homes and negotiating the price and terms that improve your chances of selling at a profit. I guide you through making renovation decisions that promise to deliver the most bang for your buck, and I show you how to spruce up a home to draw in more potential buyers.
I don’t want to see you get in over your head or blow your entire life savings on a failed real estate investment, so throughout this book I provide plenty of time- and money-saving tips, cautions to help you avoid catastrophe, and pointers to keep your projects within budget and on schedule. I steer you clear of risky, unethical, and illegal ventures and encourage you to wade out slowly and remain well within your comfort zone. After you successfully flip a few easy properties, you quickly become aware of when you’re ready to take on bigger projects, and by that time, you no longer need my advice.
My goal is to help you decide whether house flipping is for you, and, if it is, I provide you with the knowledge and insight you need to succeed. Flipping houses can be one of the most rewarding and profitable ways to invest your time and money. This book shows you how to do it right, minimize risks, and maximize your potential profit.
Although I encourage you to read every single word of this book from start to finish, you’re welcome to skip around to acquire your knowledge on a need-to-know basis and to completely skip the sidebars (in shaded boxes). Although the sidebars may be too fascinating to ignore, they’re not essential.
One brief note: Within this book, you may note that some web addresses break across two lines of text. If you’re reading this book in print and want to visit one of these web pages, simply key in the web address exactly as it’s noted in the text, pretending as though the line break doesn’t exist. If you’re reading this as an e-book, you’ve got it easy — just tap the web address to be taken directly to the web page.
If you’re reading this book, I assume you’re a homeowner. I wouldn’t buy a car from a car salesman who didn’t drive, and I wouldn’t buy a house from someone who rents an apartment. When you own your own place, you pick up some street smarts about the value of a home, its emotional effect on people, its value as an investment, and the work required to properly maintain it. If you’re not a homeowner, sell this book and put the proceeds toward a down payment on a house. Come back in a couple of years. I’ll be waiting for you.
Other foolish assumptions I’ve made include the following:
Throughout this book, icons in the margins highlight different types of information that call out for your attention. Here are the icons you’ll see and a brief description of each.
In addition to the abundance of information and guidance on flipping houses that I provide in this book, you also get access to even more help and information online. Go to www.dummies.com
and search for “Flipping Houses For Dummies Cheat Sheet” for a free cheat sheet that accompanies this book. It includes a checklist for revamping a quick-flip property, offers tips for financing flips — and more.
Think of this book as an all-you-can-eat buffet. You can grab a plate, start at the beginning, and read one chapter right after another, or you can dip into any chapter and pile your plate high with the information it contains.
If you’re looking for a quick overview of house flipping, check out Chapter 1. Before you even start house hunting, check out Chapter 4 to discover how to build a strong support network and Chapter 5 to find out how to finance your flip — you need cash and plenty of it to flip a house. Chapter 12 helps you determine how much you can afford to pay for a property to increase your odds of walking away with a profit. And the chapters in Part 3 are indispensable in helping you track down potentially profitable properties and negotiate the purchase. Wherever you choose to start, you’ll find plenty of useful information and guidance.
Part 1
IN THIS PART …
Get up to speed in a hurry on the process of flipping houses.
Flip houses the right way and avoid fraudulent flipping schemes.
Find out whether you have what it takes to flip houses in terms of time, money, and mindset.
Explore a variety of house flipping strategies ranging from buy-fix-and-sell to buy-hold-and-lease.
Build a dream team of real estate professionals, lenders, and contractors to expedite your flips and cover your back.
Get your mitts on some cash to finance your flips by using your own and other people’s money (OPM).
Chapter 1
IN THIS CHAPTER
Understanding the concept and challenges of flipping
Flipping the right way — legally and ethically
Developing a winning strategy and the right connections
Marketing and staging a house to maximize your profit
Flipping sounds easy. You can flip a pancake. You can flip a coin. Without too much effort, you can even flip out. Flipping a house, though, requires a level of knowledge, expertise, and sticktoitism unrivaled by any of these mindless tasks. It requires access to cash, and lots of it. It demands time, energy, vision, attention to detail, and the ability and desire to network with everyone — from buyers and sellers to real estate professionals, contractors, and lenders.
In this chapter, I offer a broad overview of what flipping houses is all about. I introduce the overall strategy of flipping houses — buy low, renovate, and sell a property at fair market value to earn a fair market profit. I also reveal the difference between flipping the right way — legally and ethically — and flipping the wrong way — ripping off buyers, sellers, and lenders for a quick wad of cash.
In investment circles, the secret to success is cliché: buy low, sell high. This same principle applies to flipping houses. To succeed, you buy a house at 20 percent to 50 percent below market value, repair and renovate the property, and then turn around and sell it at market value. That three-step process — buy, fix, and sell — certainly sounds easy enough, but each step carries with it a host of unique challenges, as I point out in the following sections.
Homeowners don’t exactly line up around the block waiting to sell their homes for less than they’re worth. As a house flipper, your job is to hunt for the homes in your area that are dontwanners, as in “the owners don’t want ’er.” These orphan homes usually appear bedraggled. The yard looks like a weedy wasteland, the gutters are hanging off like old false eyelashes, the paint’s peeling, and the interior is completely trashed. These properties are often referred to as distressed, and their appearance indicates that their owners are distressed as well. Their dream home has become a nightmare.
When homeowners need to shed the burden of home ownership, they may not have the time and resources to repair and renovate it, place it on the market, and wait for months or even a year for a buyer to make a reasonable offer. In such cases, they’re often willing to sell at a greatly reduced price to a serious buyer who has the financial resources to close the deal. How do you discover opportunities like this? In Part 2, I point out several techniques for discovering distressed properties and their distressed owners.
Flipping houses is a risky venture, but you can minimize risk and maximize profit by doing your homework:
When you buy a house at a bargain-basement price, it usually requires some tender loving care to make it marketable. In some cases, a thorough cleaning, a fresh coat of paint (inside and out), and new carpeting do the trick. In a matter of days or a couple of weeks, and with a small investment, you can often boost the value of a home just by making it look brand-new again.
Other houses require more extensive renovations. You may be able to convert unused attic or porch space into a bedroom; knock out a wall or two to combine the kitchen, dining room, and living room into a great room; install new windows; or even build a second story. The chapters in Part 4 cover everything from quick-flip cosmetic jobs to extensive renovations and provide plenty of tips to stay on budget.
The old adage of house flipping is that “You make your money when you buy.” But you realize your profit only after selling the house. Assuming you purchase the property at the right price, avoid overspending on repairs and renovations, and flip in a relatively stable market, you should have no trouble selling the house at a profit simply by selling it at or near market value. (See Part 5 for details.)
In real estate circles, the word flip is often construed as just another four-letter word. Utter the “F word” at a real estate conference or seminar, and you’re likely to spend your lunch break at a cozy table for one. The reason for this cold shoulder from the real estate community is that way back in September 2001, the U.S. Department of Housing and Urban Development (HUD) released FR (Final Rule)-4615 Prohibition of Property Flipping, which made “flipping” illegal.
So, why am I writing a book that promotes this illegal activity? Because the word flip has a double meaning, as the following sections reveal.
Criminal minds have invented countless ways of milking the real estate industry, and one way is to flip houses. This sinister type of house flipping typically relies on some form of fraud — lying or misrepresenting information. In some cases, the con artists hook up with crooked appraisers who artificially inflate home values and then sell overpriced homes to ill-informed buyers.
Another way con artists scam the system through flipping is to build a team of buyers, none of whom intends to own the property for any length of time. They buy homes from one another, increasing the price with each sale. False appraisals or crooked appraisers make the price hikes look legitimate, and corrupt loan officers often expedite the loan-approval process. As the value of the property increases on paper, the amount of equity in the property increases. The final buyer takes out a whopping loan to pay the previous owner and then defaults on the loan. The team splits the proceeds, sticking the lender with the bill and leaving a legacy of foreclosures and vacancies.
Flipping the right way is a perfectly legitimate strategy for making money in real estate. You buy a property below market value, fix it up, and sell it for more than you invested in it. Do it well and you can earn a handsome profit. Make a serious blunder and you suffer a loss. This fix-it-and-flip-it approach has a positive effect on the real estate market. It increases property values, improves neighborhoods, and provides quality housing for those who need it. It’s the American way — capitalism at work.
Although anyone can profit from flipping houses, it’s not quite as easy as it looks on TV. Buying a house that’s brimming with potential for 20 percent to 50 percent less than you know you can sell it for is a huge challenge in itself, but after you take possession of the property, the real fun begins. Your contractor disappears after collecting your deposit. The landscapers hack through a buried cable. You find out that the septic system needs to be replaced. And the neighborhood association rejects every single one of your planned improvements.
See Chapter 2 for additional guidance in deciding whether you have what it takes to flip houses.
No two flippers have the same strategy. Some choose to live in the house they flip, while others find that too stressful. Some flip the house they live in every two or three years to take advantage of a lucrative federal tax exclusion (see Chapter 23), while others flip a house once every month or two for quick profits. Many investors focus on a niche market, such as foreclosure properties, HUD properties, or For Sale By Owner (FSBO) homes.
Plan your flip at least as carefully as you would plan a two-week vacation. Chapters 3 to 5 help you lay the foundation for a successful flip.
When you’re gambling with more than $100,000 of your own or someone else’s money, learning by trial and error can be catastrophic. A safer way to develop the skills and foresight needed to reduce costly mistakes is to learn from others. Develop your own house flipping team and rely on the following professionals to guide and educate you:
In Chapter 4, I describe the role that each of these valuable individuals plays on your team, and I provide some criteria for selecting the best of the bunch.
Scope out a fertile neighborhood — often an area with homes that are at least 20 years old.
See Chapter 6 for details.
Zoom in on a dontwanner — a distressed property that the owner obviously doesn’t want or can’t afford to keep.
A distressed house usually has a distressed owner. See Chapters 7 to 9 for various ways of finding distressed properties.
Research the property carefully and calculate the most you can pay for it and still earn a decent profit.
You should be fairly certain that you’ll earn at least 20 percent for your trouble. See Part 3 for more about researching and evaluating properties and calculating a maximum purchase price.
Haggle with the seller to purchase the house at a price that virtually ensures that you’ll profit from the flip, as I explain in Chapter 13.
In some cases, you won’t be haggling with sellers but bidding at an auction; see Chapters 8 and 9 for details on finding and buying properties in foreclosure and other special markets.
Buying a house to flip is like buying a beat-up antique at a garage sale. You got the house for a bargain because it needs work that the seller hasn’t the time, money, or desire to do. By cleaning up the joint, fixing whatever’s broken, and doing a few renovations, you can bring the property up to market standards and sell it for its full market value. In the following sections, I walk you through the types of repairs and renovations you can make.
Repairs and renovations require careful planning and execution to keep them on schedule and within budget. Before you begin, prioritize your repairs and renovations so you know what’s most important; I give you all the tools and tips you need in Chapter 14. Invest your time and money in the repairs and renovations that promise the most bang for your buck, and then if you need to trim costs, you can skimp on the less-important stuff.
The ideal house for a first-time flipper is one that requires only cosmetic work — what I call makeup. Cosmetic work, covered in Chapter 15, includes the following low-cost repairs and renovations:
Curb appeal is everything when you’re trying to sell a house. If prospective buyers pull up in front of a house that looks disheveled, they’re likely to pull away before you have time to open the front door. To sell your house for top dollar, it has to make a good first impression. It must have curb appeal — a fresh, well-manicured appearance that draws people into the home.
Chapter 16 shows you how to landscape and prepare the exterior of the house to make it draw passersby inside for a closer look.
Depending on their condition, kitchens and bathrooms sell houses or sink deals. A spacious kitchen with plenty of counter space and all the essential amenities — a clean range, refrigerator, microwave oven, and dishwasher — creates an impression that the kitchen is a great place to prepare meals and hang out with friends and family members. A sparkling-clean, well-lit bathroom with plenty of storage space creates a sense of comfort and cleanliness that permeates the house.
Somewhere between painting a room and building a room addition are moderate changes that you can make to a house to improve its value and draw more buyers. These improvements include installing replacement windows, replacing the screen doors or entry doors, and refinishing wood floors or installing tile or vinyl flooring. Chapter 18 lays out your options.
Some houses are begging for a few major overhauls. Maybe the house has an unfinished attic that’s perfect for an additional bedroom or a beautifully landscaped backyard that has no easy access and no deck or patio. In some cases, you may discover a dinky house surrounded by mansions. By raising the roof and building a second story, you can double the living space and boost the house into a higher bracket. Chapter 19 takes on some of these major renovations, which may inspire your own creative visions.
Although this book focuses on the buy-fix-sell approach to flipping houses, you can profit from a flip in numerous ways, including the following:
See Chapter 20 for details on the various approaches to profit from a flip. In Chapters 21 and 22, I explain how to market and sell your home for top dollar. And in Chapter 23, I explain certain tax considerations that may help you keep more of your profit by paying less of it to your rich Uncle Sam.
Chapter 2
IN THIS CHAPTER
Squeezing a house flip into your already hectic schedule
Taking inventory of your financial readiness
Checking your gut for the daring and determination to succeed
Putting together the tools you need
Anyone can do it.
If I had a nickel for every time I heard someone say that about flipping houses, I could retire on my own private island in the Pacific. When a real estate investment guru says, “Anyone can do it,” what she really means is, “Anyone like me can do it.”
I prefer presenting house flipping in a more realistic light by saying, “Anyone who has sufficient desire, energy, and sticktoitism can do it.” By following the advice in this book, you can acquire the necessary knowledge, gather investment capital, and find plenty of properties to flip, but if you don’t have sufficient gusto and grit, your flips will most assuredly flop.
This chapter leads you on a journey of self-examination to determine whether you have the right stuff to flip real estate — time, energy, a strong financial position (with your own or other people’s money — OPM), organizational expertise, people skills, tenacity, decisiveness, imagination, endurance, a healthy sense of humor, and a good support system.
Most casual house flippers are weekend warriors. They hold down a day job of 40 or so hours a week and then work nights, weekends, holidays, and vacations on flipping houses. They typically invest anywhere from 20 to 40 hours a week, depending on how dilapidated the houses are, how ambitious they are to turn a profit, and how much of the work they want or need to do themselves.
Full-time flippers, who have enough cash on hand to finance their flips and cover their living expenses, typically invest 40 to 80 hours a week.
Although you may be able to delegate most of the work that goes into flipping a house, several tasks demand your uninterrupted time and focus:
In the following sections, I explain the advantages and disadvantages of part-time flipping, tell you when you can safely start flipping full time, and list the tasks that you should (and shouldn’t) delegate to save time.
When you’re just starting out, consider keeping your day job and moonlighting as a house flipper until you establish yourself. Your day job provides steady income and security, which enables you to qualify for traditional financing at lower interest rates. Your paycheck helps you cover the mortgage payments, finance renovations, pay quarterly income-tax payments, and stay afloat when the housing market cools. Your full-time job also (hopefully) provides you with health and dental insurance, retirement planning, and other benefits you don’t get from flipping houses.
To compensate for some of the drawbacks, consider the following solutions for integrating part-time flipping into your life:
Full-time flipping requires a big time commitment and a cash reserve to back it up. You need enough cash on hand not only to fuel your flip but also to cover several months of living expenses. Most flippers choose to become full-time flippers only after they successfully flip several properties, have a proven system in place, and have the financial resources to live without another source of income for at least one full year.
Without these essentials, along with a strong work ethic, determination, sufficient cash reserves, a well-defined goal, and a solid plan to achieve that goal, failure is almost guaranteed.
You can get more done in less time by delegating tasks. But be careful when choosing tasks to delegate. You can safely farm out any of the following jobs:
Job |
Delegate to |
Mowing lawn or shoveling snow |
Day laborer or trusted kid |
Heating, plumbing, gas, and electrical repairs |
Licensed and insured contractors |
Listing or selling home |
Qualified and trusted real estate agent |
Setting appointments to look at houses for sale |
Real estate agent, family member, or friend |
Cosmetic repairs, such as painting and carpeting |
Qualified painters and carpet installers |
Minor repairs and small projects, such as repairing a leaky faucet |
Local handyman or woman |
Marketing the rehabbed home, including distribution of signs and flyers |
Real estate agent, family member, or friend |
Showing the rehabbed home to prospective buyers |
Real estate agent, family member, or friend |